I am terribly sorry to inform my fans that all postings to this blog will remain suspended till ( and including) August 31st, 2017, due to personal reasons. Thanks in advance for understanding. Yours very truly.

The heart of the Indian economy is its small and medium business segment. As on today we have about 50 million SMEs in India – contributing almost 37% of the industrial output and 46% of India’s total export. With a stable growth rate of over 10%, SME India employs a staggering 120 million people and has emerged as the leading employment-generating sector, over the years. It goes without saying, that when the nation is on the verge of a massive taxation regime change in the form of GST – its impact on the life of SMEs is super critical for the nation as a whole.

At the 16th GST Council meeting on the 11th of June, 2017 – the turnover limit for composition scheme was recommended to be increased from the current INR 50 lakhs to INR 75 lakhs. In light of this recent development, let’s revisit the impact the composition provision will have on the many SMEs – both those who have been under composition in the current regime and will continue to remain so under GST; and especially those, who were looking to getting registered, but now suddenly have an option to take the composition scheme – thanks to the increase of INR 25 lakhs in the limit.Pros

Increased threshold limit

In the current regime, the exit threshold for composition scheme across most states is INR 50 lakhs. Under GST, this limit, although initially kept at INR 50 lakhs has now been increased to INR 75 lakhs (except for Special Category States – Uttarakhand, Himachal Pradesh, Sikkim and the 7 NE states – for whom the limit stays at INR 50 lakhs until next discussion). It is obvious, that this will make more number of SMEs eligible to take the benefit of the composition scheme. More good news might await SMEs, since the limit could be increased to a maximum of INR 1 crore, on the recommendations of the GST Council.

Lower rate of tax

Compared to dealers, who are liable to register, a composite dealer will enjoy the main benefit of paying a comparatively lower rate of tax. The rate of tax has been fixed at – 2% for a manufacturer, 1% for a trader and 5% for small restaurants – engaged in supplies of food and drinks for human consumption.

Lesser compliance activity

Compared to registered dealers, a composite dealer will be spared the brunt of 3 monthly returns – rather he will be required to file 1 quarterly return, every 3 months and 1 annual return. This will surely save a lot of time for a composite dealer, allowing him to focus on core business activities which are crucial to keep him afloat in the market.

Cons

Restrictions on nature of goods & services

A composite dealer cannot be engaged in the manufacture of certain notified goods, which would be specified by the Government and the GST Council. While we await more clarity on the same, the restriction in terms of services is pretty clear – a composite tax payer cannot be engaged in any service other than the supply of food and drinks for human consumption – in other words, a small restaurant is the maximum, a composition dealer can think of setting up. Also, a composite tax payer cannot supply goods outside the ambit of GST.

Restrictions on mode of trade

A composite dealer, as per the GST law, cannot engage in trade on e-commerce platforms and also, cannot engage in interstate outward supplies of goods or services. In other words, SMEs who would want to transcend their horizons by going the online way and would want to serve customers in other states, will not have the option to enjoy the composition scheme, irrespective of turnover.

No ‘selective’ composition scheme

In the current registration system, there is a standard practice of multiple business verticals and establishments with multiple registrations – which allowed the possibility of the composition scheme being availed for selected businesses. But under GST, registration will be PAN based. Most importantly, composition scheme will be applicable for all business verticals – within state or interstate – registered with the same PAN. Thus, an SME may have different business verticals that too, spread across several states – but will not be able to select specific verticals and/or branches for composition scheme. What it also means is – A registered person with a single PAN of operations in multiple states, has to either opt for “Composition scheme” for all businesses across the country, or opt for regular dealership.

No tax collection, no ITC

A composite dealer does not have to collect tax on his outwards supplies of good or services. But, most importantly, the composite tax payer is not eligible to claim input tax credit on all his inward supply of goods and / or services – even if he makes a taxable purchase from a regular taxable dealer. As a result, the taxable amount gets added to the cost of the composite dealer, ultimately increasing the cost for his customers. This is bound to take a toll on his competitiveness, in comparison to regular dealers.

More depth in compliance

In the current composition scheme, a composite dealer has to declare only the aggregate turnover of sales; he is not required to declare invoice wise details. In GST however, the composite tax payer will need to file GST returns with the invoice wise details of inward supplies (which is auto-populated based on Form GSTR-1 filed by his supplier) along with the aggregate turnover of outward supplies. Thus, this will require an SME under composition scheme to maintain his accounting and transaction records properly.

Conclusion

On the face of it, it may not be a good idea for an SME to opt for composition, even though it means increased compliance, because it could translate to greater business benefits in the long run. However, if an SME is purely into B2C business, the composition rate is low and the net margins are higher, composition may turn out to be a viable option.

1. TAX INVOICES BY THE REGISTERED SUPPLIER OF TAXABLE SERVICES: Tax Invoice shall contain the following minimum particulars: (a) Name, address and Goods and Services Tax Identification Number of the supplier;

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✍ Old Sales Tax/ Manufacturing Tax/ Service Tax Registration Numbers will go and new PAN based Registration Number for GST is essential. Structure of this number is as under:

07AAAAA0000A1ZZ

Out of which first two digits are state code (in which Registration is taken)- ’07’ is for Delhi,

Next 10 digits (AAAAA0000A) are PAN number of the assessee

and last 3 digits are serial number.
✍ Incidence of GST is on following:

Supply of Goods or Services.

Agreed to Supply Goods or Services for Consideration (either in cash or in kind).

Destination based Tax will be charged (If source & destination are in same state, then it is Intrastate Transaction, if source & destination are in different states, then it is Interstate Transaction).

Branch Transfer/ Stock Transfer will also attract GST.

Now concept of Statutory Forms such as ‘C’ form/ ‘F’ form become outdated.
✍ GST Registration is mandatory, if Annual Turnover is Rs. 20 Lacs or more. However if you are engaged in Interstate transactions, Limit of Rs. 20 Lacs will not be applicable and you have to take Registration in all cases.
✍ Three types of GST are there:

Central Goods & Service Tax (CGST)

State Goods & Service Tax (SGST)

Integrated Goods & Service Tax (IGST)
✍ Rates under GST:

Rates of CGST & SGST shall be equal and will be 50% of the rates stipulated for those specific Goods or specific Services. e.g. if the goods under transaction attract 18%, then CGST for them is 9% and SGST for them is 9%.

In case of Local Invoice or Intrastate Invoice, CGST and SGST both need to be charged separately and to be mentioned in the Return accordingly.

Rates of IGST shall be equal to the sum of rate under CGST and rate under SGST. Thus in above example, rate under IGST is 18% (9 + 9).

In case of Central Invoice or Interstate Invoice, IGST need to be charged and to be mentioned in the Return accordingly.

Input Tax Credit shall be available for all these three taxes viz. CGST, SGST & IGST except in some cases.

Earlier, in spite of ‘C’ or ‘H’ or ‘F’ forms, 2% tax was a cost to the assessee. now since these forms are done away with, this 2% cost is avoided, since full set-off or ITC of IGST on all Interstate Transactions is allowed now.

GST will also be chargeable on Free Items or Samples given. Thus GST needs to be paid on all items being delivered to the customer.
✍ Composition Scheme:

It is available for all assessees dealing in goods having Annual Turnover <= Rs. 75 Lacs.

Under this scheme, 2% tax is applicable for Manufacturing Organisations, 5% tax is applicable for Restaurants/ Dhabas and 1% tax is applicable for all others.

No Set-off or Input Tax Credit shall be available under this scheme.

This Scheme is Optional.

Assessee has to apply for this and then GST Official’s permission is required to opt for this.

If this scheme is availed, GST cannot be charged in the Invoices raised by the Assessee.

If this scheme availed in one year and for next year you intend to opt out of this scheme, you can apply to GST officials and take permission for the same i.e. either to Opt In or Opt Out of the scheme.

Service Providers shall not be eligible for the Composition Scheme. ✍ Immovable Property is not Taxable under GST. Thus, if the flat is booked before Completion Certificate, it is Taxable under GST, whereas if the flat is purchased after Completion Certificate (Ready Possession Flats), it will not be Taxable under GST.

✍ GST is also applicable on Advance from Customers, as and when it is received from the customer, before raising invoice for the same. It needs to be declared in the Output GST Return (GSTR-1).

✍ URD Purchases (Purchases from Unregistered Dealers/ Suppliers):

If the Assessee Purchased from Unregistered Dealers, Assessee has to ACTUALLY Pay GST on the same Purchases under Reverse Charge. However, Assessee can take set-off or Input Tax Credit of the same.

✍ No Revision of Return is allowed under GST.

✍ Input Tax Credit:

Assessee has to be in Possession of Tax Invoice or Debit Note or Credit Note and Goods or Services must have been received by the Recipient.

Payment has to be made to the Supplier within 180 days. If the payment is not made to the supplier within this period, the ITC has to be reversed by the Assessee. It can later be availed, as and when actual payment of this is made to the Supplier.

ITC of GST paid under Reverse Charge (GST paid on Unregistered Purchase or on Other Specified Services under Reverse Charge) can be availed.

✍ GST Rating:

There will be GST Compliance Rating (just like CIBIL Credit Rating) in respect of Assessee, in consideration of timely filing of Returns, timely GST Payments and other discipline followed by the Assessee.

This can be viewed by the Assessee and also by others.

Thus while selecting the Supplier, his GST Compliance Rating can be viewed beforehand.

It will also be viewed by Bankers, Financial Institutions while lending money to the Assessee.

✍ Input Tax Credit under GST shall be used in the following manner and in the same sequence:

15th of Next Month- Input GST i.e. Purchase Return (GSTR-2). These entries have to match with the entries made by your suppliers in their GSTR-1.

20th of Next Month- Net GST Payment i.e. Final Return (GSTR-3). Liability of GST Payment shall be calculated by the System itself, after filing of GSTR-1 & GSTR-2 as mentioned above.

31st December of Next Financial Year- Annual Return (GSTR-9), alongwith Audit Report. Audit is compulsory for the Assessees having Annual Turnover of Rs. 2 Crore and more.

Thus during the year, total 37 Returns (12 months X 3 each month = 36 plus 1 Annual Return) are to be filed by the Assessee for each Place of Business. If the Assessee is carrying out business at more than one places, he has to obtain GST Registration at each of such place and has to file 37 Returns for each of such place of business.